This project will examine the impact of cost-sharing policy on the behavior of users of mental health services, examine the impact of payment policy on the behavior of providers of mental health services; and investigate ways to integrate the two policy instruments. The purpose is to characterize the "optimal" reimbursement policy that which provides the maximum benefits to patients for a given level of resources to the mental health system. Recent changes in private and government reimbursement of such services have generally been in the direction of increasing the costs and risks borne by mental health users and providers. Understanding how users and providers respond to these changes, predicting any cost savings that may result, and suggesting appropirate policy alternatives will be the primary goal of the proposed research. The first research effort is to develop a conceptual model of mental health provide response to the reimbursement system, and to use the model to predict the impact of various reimbursement policy alternatives on provider behavior. The work will build upon the recent conceptual work in Ellis and McGuire (1986b) that examines the physicians choice of the length of stay for patients under prospective payment. The second research effort is to estimate some of the key parameters reflecting provider response to the reimbursement system. These might include changes in patient transfer rates, lengths of stay, or readmissions. Provider response will be estimated using either a Medicare claims file or one of two private insurer claims files. The third research effort is to develop and estimate a structural model of consumer resonse to demand-side const-sharing. A structural model implies that parameters of the consumer response functions will be estimated that can be applied to other settings. Rather than estimating the impact of an entire insurance plan, attention will be given to individual plan characteristics and how they affect demand. The fourth research effort is to integrate demand side cost- sharing policies with supply side payment mechanisms. Prospective payment is a relatively new policy instrument. Considering its impact on patterns of care, and integraing the role of prospective payment with traditional demand-side cost-sharing is an important task on the health and mental health policy agenda. This work will integrate the results from the above three efforts.